Calculate ROE given Net Margin 8%, Asset Turnover 1.5, Equity Multiplier 2.0.

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

Calculate ROE given Net Margin 8%, Asset Turnover 1.5, Equity Multiplier 2.0.

Explanation:
Using the DuPont decomposition, ROE is broken down as Net Margin × Asset Turnover × Equity Multiplier. Plugging in the given values: Net Margin = 0.08, Asset Turnover = 1.5, Equity Multiplier = 2.0. ROE = 0.08 × 1.5 × 2.0 = 0.24, or 24%. Net margin shows profitability per dollar of sales, asset turnover reflects how efficiently assets generate sales, and the equity multiplier captures financial leverage (assets funded by debt versus equity). The combination of these three factors here yields 24%. If you tried to hit 24% with the other options, you’d need different leverage or profitability, which the given figures don’t provide.

Using the DuPont decomposition, ROE is broken down as Net Margin × Asset Turnover × Equity Multiplier. Plugging in the given values: Net Margin = 0.08, Asset Turnover = 1.5, Equity Multiplier = 2.0.

ROE = 0.08 × 1.5 × 2.0 = 0.24, or 24%.

Net margin shows profitability per dollar of sales, asset turnover reflects how efficiently assets generate sales, and the equity multiplier captures financial leverage (assets funded by debt versus equity). The combination of these three factors here yields 24%. If you tried to hit 24% with the other options, you’d need different leverage or profitability, which the given figures don’t provide.

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